Since the appearance of Bitcoin in 2008, we have witnessed a growing association between the cryptocurrencies and the money laundering. This has caused part of mistrust from the governments, as well as caution from potential users. However, this kind of activities were alive long before the cryptocurrencies. That is the reason why it is so important to know the level of association between them. In this post we will see how reliable these worries are and the real level of caution we should have about these assets.
What kind of activities are considered as money laundering?
First of all, we must have clear what we mean by money laundering activities. According to the Interpol, “money laundering is concealing or disguising the origins of illegally obtained proceeds so that they appear to have originated from legitimate sources. It is frequently a component of other serious crimes such as drug dealing, robbery or extortion.”
This means that the money laundering consists in entering into the legal economy illegally obtained funds. For obvious reasons, these activities are usually related to crimes, because otherwise the money from these activities would become useless. Both type of activities are framed under the AML / CFT regulation, which is present in almost every country.
We can also consider as money laundering the fraudulent use of payments in kind. One good example in the retail space could be the use of lunch tickets by employees. The use of this kind of tickets is focused on subsidizing the cost of the food for the employees of some companies. However, we may pay for the food of more than one person and then ask for the reimbursement in cash. In that case we would obtain legal cash money from a payment in kind which tax regime is more favorable for us.
There are some other ways of laundering money, such as the purchase of real state, art pieces, etc. In fact, thanks to the new technologies we have seen more and more ways of laundering money over the time. On of the consequences of these activities are the tax evasion, as we saw in the payments in kind example. On the other side, these activities make more difficult to pursue the underlying crime, because once the money is clean, it becomes untraceable.
At the end, the money laundering has several negative consequences for the economic system where it takes place. Usually, these activities are carried out in countries with a medium or low economic development, where the financial controls are more flexible. Additionally, it is also important to know the banking system of the country. In the so called “tax havens”, the information about the origin of the funds is to mandatory for the banks to publish. That is one of the reasons why most of the money laundering activities take place in collaboration with these entities. Let’s take a look to the main consequences of these activities in the economy:
- Tax evasion – the money laundering can generate tax benefits thanks to the different tax regime between cash and other forms of payments. This is equivalent to the impact of undeclared payments for example.
- General corruption – in several occasions, the money laundering activities require collaboration from the authorities. This is something which makes much more difficult to trace and eradicate these crimes.
- Higher level of criminality – this is quite connected to the previous point. If the money laundering activities succeed, it is likely that the crimes connected to these activities also increase.
- Loss of population trust – logically, the increase in this kind of activities will affect the confidence of the people in the capacity of the system to eradicate these crimes.
- Price inflation for certain assets – when the money laundering takes place through the purchase of assets such as the real state, these assets may suffer a peak in prices which may finally have an impact in the general population.
How these activities have been traditionally performed?
Previously we have already seen some examples for money laundering activities. However, most of all these activities have a common denominator, which is the cash money. This payment method is by far the most used method to launder money thanks to the lack of traceability. We are talking about a totally physical and anonymous for of money, which makes it very difficult to track.
In fact, one of the most classical forms of money laundering is the movement of the cash in small quantities. From several years until now, most of the countries have developed controls to watch over the banking withdraws and the entries of cash money to prevent money laundering. When the cash goes over certain levels, it is mandatory for the client to justify the origin of the funds to avoid further investigations.
Another popular way of laundering money is the creation of fake companies or the use of figureheads. Thanks to them, it becomes possible to obtain fake loans in order to launder the money. Additionally, the existence of tax havens is something which permits these movements of cash money.
With the new technologies, and specially with the cryptocurrencies, new forms of money laundering have born. The lack of transparency and control from many financial institutions have acted like triggers. However, we will see below that the impact has not been that high.
Impact of the cryptocurrencies in money laundering
The cryptocurrencies have become a huge revolution in the financial industry since they arrived. Their anonymous and cross-border definition makes them really fit for small payments. Furthermore, every transaction is available for the users, which gives them reasons to rely on the records. However, there are other elements which contribute negatively to their connection with money laundering.
We already saw in the post about DLT networks that the users of many cryptocurrencies are not really identify in their networks. They have two unique keys (private and public) and they use them to send and verify the transactions. These keys should serve to make easier the trace of the transactions, although it is not a simple process.
The anonymous character of the transactions is one of the reasons for the lack of trust from the authorities. These authorities fear the use of cryptocurrencies (with Bitcoin in the first position) for money laundering and financing of the terrorism. The reasons for these fears are connected to the lack of willing to inform the users data, as well as the lack of regulation due to the recent of their technology.
If we search through the data, the truth is that the cryptocurrencies are far from reaching a liquidity level similar to any developed financial system. From that liquidity, some part will go for sure to finance illegal activities but, according to different reports, that part is not so significant. Let’s see a summary of the main points related to this discussion:
Bitcoin and the money laundering
Bitcoin is, as we already know, the most representative of the cryptocurrencies. Its use has been growing over the years, not only as investment asset but also as payment method. Below we can have a look to the main data about the current use of Bitcoin for money laundering:
- In Ausgust, 2018, according to Bloomberg, just the 10% part of the Bitcoin transactions where from illegal activities. This data is far from 90% registered in 2013.
- According to the analysis of Glassnode, the 63% of Bitcoin owners did not transact in the last year (data from September, 2020). This information shows the lack of movement of the currency through the network.
- Regarding the money laundering, there are 800 USD spent in the dark web for every dollar of Bitcoin. This represents a 0,125% of the crypto against the fiat money.
- According to the report of Chainalysis, the money laundering in 2021 has grown 30% compared to 2020. However, the same report says that the total amount of laundered money is just a 0,5% of the total traded volume.
All this information proves that the illegal use of the cryptocurrencies is minority than their legal use. The latter has grown recently thanks to the similarity of cryptocurrencies with gold. Therefore, there are a lot of investors who use them to diversify their portfolios.
The lack of movement of the cryptocurrencies among the investors supports clearly the role of cryptocurrencies as defensive assets. On the other side, the number of companies which accept these assets as payment methods is growing over the time. This reinforces their capability to become an alternative to the fiat money.
However, the truth is that we have observed money laundering activities in multiple cryptocurrencies networks. The configuration of these networks is usually anonymous, although all the transactions remain visible in the blockchain, allowing their traceability. The money laundering takes place through the creation of banking accounts in order to acquire the cryptocurrencies. After that, the users transfer the money through the network to the final accounts, where the money is clean. It is difficult to the authorities to trace these transactions due to their anonymity. This is one of the reasons why the financial institutions are researching about the possibility of issuing CBDC.
Given the fact that the financial industry is widely regulated, it is logic to observe a severe control over its activities. This is even more important when the goal is to prevent criminal activities such as money laundering or the financing of terrorism. Additionally, it is important to have in mind that these activities already took place long before the appearance of cryptocurrencies. That is the reason why it is so important to distinguish between their original goal and the use cases they finally had.
In general terms, it is true that the cryptocurrencies have some characteristics which makes them fit to money laundering activities. The lack of transparency and regulation make more difficult to trace the funds. However, the shown data are quite illustrative. The increase in the use of cryptocurrencies is by far due to legal transactions instead of illegal activities.
That is the reason why we should not criminalize the cryptocurrencies because of some frauds through them. Or, at least, we should not criminalize them more than any other form of payment system, for instance the cash money. There is no doubt about the importance of persecuting the illegal use of cryptocurrencies, but this does not mean the latter are the cause of the former. In fact, the money laundering is as old as the activities it finances, which came long before the cryptocurrencies.
In this sense, it is mandatory for the authorities to persecute the money laundering activities. It is also mandatory for them to develop a legal frame for cryptocurrencies in order to make easier their assimilation with other financial assets. If this legal frame has a technology neutral character, it will allow the growth of cryptocurrencies without becoming a bigger risk for the financial system.